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Is Social Security Benefits Taxed

Up To 85% Of A Taxpayers Benefits May Be Taxable If They Are:

Is Social Security Taxable?
  • Filing single, head of household or qualifying widow or widower with more than $34,000 income.

The Interactive Tax Assistant on IRS.gov can help taxpayers answer the question Are My Social Security or Railroad Retirement Tier I Benefits Taxable?

The tax filing deadline has been postponed to Wednesday, July 15, 2020. The IRS is processing tax returns, issuing refunds and accepting payments. Taxpayers who mailed a tax return will experience a longer wait. There is no need to mail a second tax return or call the IRS.

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When Do I Pay Tax On Disability Benefits

The rules for determining whether federal tax is owed on LTD or STD income depend on two things:

  • Who paid the premiums you or your employer?
  • How were premiums paid with pre-tax dollars or after-tax dollars?

Generally speaking, the tax rules work like this: if your employer paid the premiums, then the income you get on disability is taxable. Likewise, if you paid the premiums with pre-tax dollars, then your disability income is also taxable. However, if you paid the premiums with after-tax dollars, then your disability income payments are free from federal taxes. In other words, the IRS either takes tax upfront , or they take tax on the back-end . That means:

How To Calculate Your Social Security Benefit Taxes

Just because you could owe taxes on up to 50% or 85% of your Social Security benefits doesnt mean youll actually owe taxes on that amount. If you fall into the 50% taxation range, the government says you should owe taxes on the lesser of half of your Social Security benefits or half of the difference between your combined income and the taxation threshold set by the IRS for your tax filing status.

Examples make this easier to understand, so lets consider an individual who receives $12,000 in Social Security benefits annually and has a combined income of $30,000. Youd calculate the amount theyd owe taxes on this way:

  • Divide their Social Security benefits in half to get $6,000.
  • Subtract the 50% taxation threshold for the individuals tax filing status from their combined income to get $5,000.
  • Divide your result from Step 2 in half to get $2,500.
  • The individual would owe taxes on the lesser of the result from Step 1 or the result from Step 3, in this case: $2,500.
  • Things get even more complicated if you fall into the 85% taxation range. If our individual had a combined income of $40,000 instead and still received $12,000 in annual Social Security benefits, you would calculate how much they would owe in taxes this way:

  • Divide their Social Security benefits in half to get $6,000.
  • Subtract the 50% taxation threshold for the individuals tax filing status from their combined income to get $15,000.
  • Subtract the result in Step 3 from the result in Step 2 to get $6,000.
  • Read Also: Social Security Benefit Statement 2020 For Taxes

    Why Retiring At 62 Is A Good Idea

    Probably the biggest indicator that its really ok to retire early is that your debts are paid off, or theyre very close to it. Debt-free living, financial freedom, or whichever way you choose to refer it, means youve fulfilled all or most of your obligations, and youll be under much less strain in the years ahead.

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    State Taxes On Social Security

    Social Security Benefits Income Tax

    Twelve states tax Social Security benefits in some cases. Check with your state tax agency if you live in one of these statesColorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia. As with the federal tax, how these agencies tax Social Security varies by income and other criteria.

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    Social Security And Railroad Retirement Benefits

    If your social security or railroad retirement benefits were taxed on your federal return, you may take a deduction for those benefits on your North Carolina individual income tax return. You may take this deduction because this income has already been included as part of your federal adjusted gross income and North Carolina does not tax this income. This deduction will increase your refund or decrease the amount you must pay.

    Any social security benefits you received that are not included in your federal adjusted gross income cannot be deducted on your North Carolina return. If your federal adjusted gross income includes social security benefits, enter the taxable amount of social security benefits on Form D-400 Schedule S, Part B Deductions from Federal Adjusted Gross Income, Line 18. The total deductions from federal adjusted gross income entered on Form D-400 Schedule S, Line 38, also needs to be entered on Form D-400, Line 9.

    Control Your Taxes Now & Later

    The longer you wait to claim Social Security benefits, the better chance you’ll have to boost the overall tax efficiency of your retirement income plan. Here’s how.

    Drawing down traditional tax-deferred assets before collecting Social Security can enable you to control both your current and future taxes.

    The amount you withdraw from a traditional IRA, for example, lowers your account balance, which may reduce your future required minimum distributions .

    Since your RMD is considered ordinary income, having smaller distributions while you’re collecting benefits may reduce the taxes on your benefitsor keep you from paying taxes altogether.

    In addition, managing your retirement income in this way can also help you qualify to pay lower Medicare parts B and D premiums, which are income-based.

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    How Social Security Taxes Work

    The fact that levies are applied to benefits is “extremely unpopular,” Altman said. “People hate it, but it actually makes policy sense,” she said.

    One key reason that it makes for good policy is that Social Security benefits and private pensions are taxed in a similar way.

    When the program was created in 1935, benefits were not taxed. That began to change in 1983, when Congress changed the rules so that up to 50% of Social Security benefits could be included in taxable income, if a taxpayer’s income was over certain thresholds.

    More changes came in 1993, which raised the portion of certain Social Security benefits subject to taxation to 85%. That change applied to higher income beneficiaries.

    The result is a complicated set of rules that still applies today.

    First, the taxes are based on what is known as provisional or combined income. That includes half of your Social Security benefits plus your adjusted gross income and nontaxable interest. That means that any income from wages, interest, dividends or other taxable income is counted.

    Then the 50% and 85% thresholds are applied.

    Individuals with combined income between $25,000 and $34,000 will pay income tax on up to 50% of their benefits. That also goes for couples with incomes between $32,000 and $44,000.

    Individuals with combined income of more than $34,000, as well as couples with more than $44,000, may pay tax on up to 85% of their benefits.

    Calculator: How Much Of My Social Security Benefits Is Taxable

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    September 15, 2022Keywords: calculator, retirement, Social Security, tax planning

    Social Security benefits are 100% tax-free when your income is low. As your total income goes up, youll pay federal income tax on a portion of the benefits while the rest of your Social Security benefits remain tax-free. This taxable portion goes up as your income rises, but it will never exceed 85%. Even if your annual income is $1 million, at least 15% of your Social Security benefits will stay tax-free.

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    Age Of Disabled And Retired Workers 19602021

    The average age of disabled-worker beneficiaries in current-payment status declined between 1960, when DI benefits first became available to persons younger than age 50, and 2021. In 1960, the average age of a disabled worker was 57.2 years. The rapid drop in average age in the following years reflects a growing number of awards to workers under 50. By 1995, the average age fell to a low of 49.8, but by 2021, it rose to 55.3. By contrast, the average age of retired workers has changed little over time, rising from 72.4 in 1960 to 74.1 in 2021.

    74.1

    Is Social Security Disability Taxable

    You may need to pay taxes on your Social Security Disability Insurance benefits. This can happen if you receive other income that places you above a certain threshold. But, because SSDI requires you to be disabled and have limited income to be eligible, you might not have other income to exceed this threshold.

    Common examples for when your Social Security Disability Insurance benefits may be taxable are if you receive income from other sources, such as dividends or tax-exempt interest, or if your spouse earns income. If this describes your situation, you will need to know the thresholds for when your SSDI becomes taxable.

    The IRS states that your SSDI benefits may become taxable when one-half of your benefits, plus all other income, exceeds an income threshold based on your tax filing status:

    • Single, head of household, qualifying widow, and married filing separately taxpayers: $25,000

    For example, if you are married and file jointly, you can report up to $32,000 of income before needing to pay taxes on your SSDI benefits. If you earn more than these limits for these tax filing statuses, you have two different benefit inclusion rates that can apply.

    For 2021:

    • As a single filer, you may need to include up to 50% of your benefits in your taxable income if your income falls between $25,000 and $34,000.
    • Up to 85% gets included on your tax return if your income exceeds $34,000.

    For married couples who file jointly, you’d pay taxes:

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    How Much Social Security Will I Get

    SSA calculates your benefit based on the monthly average of up to 35 of your highest earning years rather than, say, your last five years. The earnings are indexed to the change in overall wage levels and the rise in the nation’s standard of living while you were employed. Your future benefits thus will reflect that rise.

    A Social Security calculator can help you figure out your benefits.

    When checking whether your earnings record is correct or not, keep in mind theres no statute of limitations on correcting errors related to wages, according to Kurt Czarnowski, a principal at Czarnowski Consulting.

    A person needs to provide proof of what the correct amount of earnings was, Czarnowski said at a recent National Association of Personal Financial Advisors conference. But even if it’s something back in 1976, if happen to have W-2, can make that correction.

    Delay or not?Should you hold off taking Social Security retirement benefits? Here’s what to consider

    Also, be aware that someone who chooses to draw benefits at the earliest possible age 62 would see their payment reduced by as much as 30%. By contrast, workers who delay retirement past their full-retirement age 66 or 67 for most people would see an 8% increase in benefits for each year they wait until 70.

    Taxation Of Benefits Is Progressive

    Are Social Security Benefits Taxable After Full Retirement Age ...

    Taxes on Social Security benefits fall more heavily on high-income than low-income taxpayers. Thats both because a larger share of benefits is taxable for high-income taxpayers and because they face higher marginal income tax rates.

    About half of Social Security beneficiaries pay no tax on their benefits because their incomes are below $25,000 , according to the Congressional Budget Office . At the other end of the income spectrum, a small number of high-income taxpayers pay as much as 31 percent of their benefits in taxes. Thats equal to the top marginal income tax rate of 37 percent applied to 85 percent of their benefits.

    On average, beneficiaries pay about 7 percent of their benefits in income taxes. Beneficiaries with incomes below $40,000 owe less than 0.5 percent of their benefits in taxes, CBO estimates. In contrast, beneficiaries with incomes over $100,000 owe about 21 percent .

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    Three Ways To Reduce The Taxes That You Pay On Benefits

    Is Social Security taxable? For most Americans, it is. That is, a majority of those who receive Social Security benefits pay income tax on up to half or even 85% of that money because their combined income from Social Security and other sources pushes them above the very low thresholds for taxes to kick in.

    But there are three strategies you can useplace some retirement income in Roth IRAs, withdraw taxable income before retiring, or purchase an annuity, to limit the amount of tax you pay on Social Security benefits.

    The Framework For Income Taxes On Social Security Benefits

    The key to determining whether youll owe tax on a portion of your Social Security checks is whats called provisional income. Take your gross income, add in tax-exempt interest, and then add one-half of your total Social Security payments for the year. If that figure is above $25,000 for singles or $32,000 for joint filers, youll potentially owe tax on at least part of what you get from Social Security.

    Image source: Getty Images.

    Exactly how much gets added is complicated, as it depends on how far your provisional income exceeds those thresholds. From $25,000 to $34,000 for singles and $32,000 to $44,000 for joint filers, the maximum included amount is 50% of your benefits. Above those higher thresholds, up to 85% of your benefits can get taxed.

    So, with that background, heres how you can ease the blow and pay less to the IRS.

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    Experienced Legal Counsel You Can Trust

    Whatever your issue with SSDI or SSI, I can offer you sound answers based on decades of experience both hearing disability cases for the SSA and helping clients with their claims and appeals. Iâm here to help people receive the benefits they deserve when they need them.

    If youâre located in or near Raleigh, North Carolina, or Roanoke Rapids, Fayetteville, or Greensboro, feel free to reach out to me with your disability claims issues at Lloyd King Law Firm PLLC.

    Up To 85% Of A Taxpayer’s Benefits May Be Taxable If They Are:

    Good Question: Why Are Social Security Benefits Taxed?
    • Filing single, head of household or qualifying widow or widower with more than $34,000 income.

    The Interactive Tax Assistant on IRS.gov can help taxpayers answer the question Are My Social Security or Railroad Retirement Tier I Benefits Taxable?

    The tax filing deadline has been postponed to Wednesday, July 15, 2020. The IRS is processing tax returns, issuing refunds and accepting payments. Taxpayers who mailed a tax return will experience a longer wait. There is no need to mail a second tax return or call the IRS.

    Read Also: Can Social Security Benefits Be Garnished For State Taxes

    Retirees In These 12 States Risk Losing Some Of Their Social Security Checks

    Many, if not most, people would agree that Social Security benefits are not enough to live on. After all, benefits only deliver an average of about 40% of pre-retirement income for medium earners and about 27% for maximum earners. The average monthly Social Security benefit was recently just about $1,666 — roughly $20,000 per year.

    The news is a little worse than that, though — because if you live in one of 12 states, your state may tax your Social Security benefits, leaving you with even less.

    Vermonts Social Security Exemption

    Vermonts personal income tax exemption of Social Security benefits reduces tax liabilities mainly for lower- and middle-income Vermonters who are retired or disabled. It does this by excluding from taxable income all or part of taxable Social Security benefits reported on the federal Form 1040, U.S. Individual Income Tax Return, which are included in federal AGI. The exemption does not exclude other types of income.

    For those who are married filing jointly and civil union partner filing jointly, the exemption applies in full up to an AGI of $60,000, phases out between $60,000-$70,000, and does not apply to filers with AGI greater than or equal to $70,000. For all other filing statuses, the Vermont exemption applies in full to an AGI up to $45,000. It then phases out smoothly for filers earning between $45,000-$55,000. It does not apply to filers with AGI greater than or equal to $55,000. The exemption reduces a taxpayers Vermont taxable income before state tax rates are applied.

    Table 2 illustrates how the Vermont exemption is applied by filing status and income level. Graph 1 shows the percentage of taxable Social Security benefits that are exempt from Vermont taxable income based on filing status and AGI.

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    To Find Out If Their Benefits Are Taxable Taxpayers Should:

    • Take one half of the Social Security money they collected during the year and add it to their other income.

    Other income includes pensions, wages, interest, dividends and capital gains.

    • If they are single and that total comes to more than $25,000, then part of their Social Security benefits may be taxable.
    • If they are married filing jointly, they should take half of their Social Security, plus half of their spouse’s Social Security, and add that to all their combined income. If that total is more than $32,000, then part of their Social Security may be taxable.

    A Couple Of Concernstaxes And Medicare Premiums

    Social Security benefits: Do you have to pay tax on them?

    This all sounds like good news so far, but you should also be aware that continuing to work past 70 could cost you a bit more in taxes and Medicare premiums.

    • Required Minimum Distributions increase your taxable incomeIf you have traditional retirement accounts, you must take an RMD at age 70½ or 72 depending on your birthday. This is considered ordinary income and could possibly push you into a higher tax bracket, especially as you continue to earn other taxable income. Not only would that possibly increase your income tax bill, youd also most likely have to pay taxes on your Social Security benefits as I describe next.
    • Increased income may make your Social Security benefits taxableThe percentage of your Social Security benefits subject to income tax will depend on your annual income. Currently, if youre a single filer and make $25,000 to $34,000, up to 50 percent of your benefits may be taxed for income over $34,000, up to 85 percent of benefits may be taxed. Current limits for married filing jointly are $32,000 to $44,000 and over $44,000 respectively.
    • Higher income might mean higher Medicare Part B and D premiumsSimilarly, you may be charged more for Medicare premiums if you earn over a certain amount. For 2022 those thresholds are $91,000 for single filers and $182,000 for married filing jointly. However, if you still have healthcare coverage through an employer, you may be able to delay taking Part B and possibly Part D.

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